How it is calculated
Reducing balance
Interest is charged only on the remaining balance; the payment is fixed:
M = P × r(1+r)^n ÷ ((1+r)^n − 1), r = rate ÷ 12Flat rate
Interest is charged on the full original amount for the whole term, even after part is repaid:
Interest = P × rate × years ; M = (P + Interest) ÷ nThe effective APR is the reducing rate that produces the same payment — the right number for comparing offers.
Worked example
A 100,000 loan at a 5% flat rate over 5 years: interest = 100,000 × 5% × 5 = 25,000, payment = 125,000 ÷ 60 ≈ 2,083. That equals an effective reducing rate of about 9.15% a year.
Frequently asked questions
Why is a flat rate more expensive than it looks?
Interest is charged on the full amount until the last month, even though you repay part each month — so the effective rate is close to double.
Are admin fees and insurance included?
No. Add any processing fees or insurance, which raise the true cost.
How do I compare two offers?
Compare the APR and the total amount repaid, not just the monthly payment.
Does early repayment save interest?
Usually yes on reducing-balance loans. On flat-rate loans it depends on the bank’s terms and early settlement fees.